TFSAs: The Perfect Birthday Gift for Your Kids

Learning-by-doing is the best way. If we want to teach our kids and grandkids about money and investing, we need to get them started with an account, not a lecture.  As parents, and perhaps grandparents, we want our kids to benefit from what we’ve learned, but still not take away from their own journey. Fintech (financial technology), is a great solution.

If you have a child or grandchild about to turn 18, set up a Tax-Free Savings Account (TFSA) for them and start them off with $100. The easiest way to do this is with a robo-adviser. Simply select one of the several Canadian robo-advisers that don’t require account minimums. Or, better yet, have your teenager do the research and choose the one she likes best.

Advantage #1: Accountability

When setting up the account online, the teenager will have to answer the typical Know Your Client (KYC) questions about age, how long the money will be invested, investing preferences, investment knowledge and risk tolerance which determine the asset allocation.

Each account will have an asset mix that includes a variety of exchange-traded funds (ETFs) holding Canadian, U.S. and global stocks and bonds. Robo-advisers now offer funds that promote the environment, responsible corporate governance, and sustainable growth in emerging markets which will appeal to many socially conscious teenagers.

Advantage #2: Diversification

It’s easy for investors to say, “I’m ok with losing some money in the short term; I understand that my investments are for the long term.” In practice, however, when the stock market suffers a correction of 20% or more, it’s emotionally harder to stand pat.  This is one reason that even seasoned investors are prone to buying high and selling low, the opposite of successful investing.

By helping budding investors tolerate choppy stock-markets when there’s only a small amount of money at risk, they’ll be better prepared for future market gyrations when there’s more money in the game.  With a balanced portfolio managed by a robo-adviser, young investors will see how different assets perform over time, and how diversification tends to reduce the overall volatility of the portfolio.

Advantage #3: Money talks

As an investment instructor, I know the value of learning the basics, but I also know that motivation is key to any learning experience. If you tell your teenager to read the business section of the newspaper to learn about investing, you’re likely to be met with a blank stare or eye-rolling. If the same teenager clicks on their robo-adviser app and sees their bond fund taking a hit, they may turn to Google for a lesson on the inverse relationship between interest rates and bond prices. Before you know it, you may find yourself in a discussion about whether the U.S. stock market is overvalued…which could provide a welcome change from: “Why can’t we have mac-and-cheese for dinner again?”

Fintech has changed the investing landscape permanently and for the better. In my opinion, the robo-adviser is the best financial innovation since the first exchange-traded fund in the world was launched on the Toronto Stock Exchange in 1990.  Teenagers, exchange-traded funds and technology make a winning combination.

The gift that keeps on giving

A final thought for parents and grandparents: An annual top-up to the account makes an excellent birthday present.

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